Did you know that when you take out a loan you could actually be reducing the amount of income taxes you have to pay to the government? Surprisingly, not all money borrowing programs are the same when it comes times to pay your taxes. Just about everybody wants to borrow money from time to time and it makes sense to do your homework before diving into a big situation involving money. Many loans may give you a tax credit which lowers the tax you owe and other kinds of loans may give you a tax deduction which reduces your gross income. Here’s a simple guide to which loans may give you for a tax credit, though obviously everyone’s tax situation will be different.
School Loans: You can, in some cases, deduct the interest you paid on the loan from your income taxes. Not all school loans are eligible for this, but it’s a good way to reduce the taxes you pay, especially if you’re a struggling student with a limited income. The interest you pay on some education loans can only be deducted if you make under a certain amount of money, based on your individual filing status.
Home Mortgages: Out of all the loans that have tax deductions associated with them, house mortgages are probably the most talked about. Most house loans are set up so that you can deduct the amount of interest you pay on the loan every year. Since most house mortgages are designed to be paid over 30 years, that means that purchasing a house can give you 30 years of possible tax benefits. For many taxpayers their home is the biggest purchase they ever make, and paying a mortgage can actually be a good way to reduce the amount of money you owe on your federal taxes each year.
Home Equity Loans: You can use a home equity loan for a variety of things, you may be able to get additional tax credits by using the money for home repairs. If your house is more valuable now than when you bought it then you might be able to take out a home equity loan (sometimes called a HELOC) and deduct the interest you pay on that loan. A home equity loan used to improve your home could eventually increase the value of your dwelling and give you even more equity in the long run. There are some restrictions about how much of your loan’s interest actually qualifies for a tax benefit. In some case you can even qualify for tax deductions for using the money to upgrade your home’s structure like replacing windows with more energy efficient types. For some homeowners some of the cost of a home equity loan can be balanced out with home improvement tax deductions.
Sometimes taking out the right kind of loan can literally save you thousands of dollars on your income taxes, so it’s worth spending a little bit of time and energy to look into what sort of tax benefits you are eligible for. There are, of course, a lot of differences between these loans. Everyone will not be eligible for all the different tax deductions that these loans may offer. Sometimes your age, the amount of money you want to borrow and the purpose of the loan will limit the amount of money you can deduct from your taxes in any given year. Before you apply for any of these loans you may want to speak with your tax professional to make sure the tax benefits pertain to your individual situation.
Want to learn more about the details of home loans? Check out our site to learn more about modifying a mortgage, upside-downmortgages and the home buyer tax credit extension.
categories: income taxes,home loans,student loans,mortgages,saving money,money,home,loans,college,home ownership
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